A Lack of Inflation Is the Surest Sign of Booming Growth
“The skill here is just incredible.” Those are the words of Apple CEO Tim Cook at a 2017 conference in China. He was describing the quality of manufacturing workers in the formerly destitute country.
Cook’s comment shows why Apple and other companies will happily continue to produce in China for the foreseeable future. There are workers, manufacturing processes, and as New York Times reporter Jack Nicas so skillfully explained it in a recent column, crucial inputs as prosaic as a tiny screw that can only be found in abundance in China. Though some Americans strangely recoil at the rise of the Chinese people from staggering poverty, the rather beautiful truth is that their emergence from desperation has been instrumental in the growth of some of the greatest American companies.
So while Apple has outsourced final production of many of its products to hundreds of thousands of Chinese workers in factories that Nicas describes as “stretching miles,” perhaps even more important is Nicas’s mention that the aforementioned assembly “includes parts made around the world — from Norway to the Philippines to Pocatello, Idaho — that are shipped to China.” Life would be quite a bit bleaker absent the global division of labor that combines the genius of so many “hands” from all over.
Interesting about Nicas’s column is that it seemingly didn’t register with his fellow Times colleague Neil Irwin. Irwin has long contended that country economies have “speed limits” beyond which prosperity becomes inflationary. On its face Irwin’s reasoning has never made sense when it’s remembered that individuals comprise an economy, and can clearly grow faster than the 3 or 4 percent “limit” that economists have laughably divined. Nicas’s Apple column similarly wrecks what Irwin imagines growth and inflation to be.
Simply put, “Made In China” and “Made In the U.S.A.” don’t mean much anymore, assuming they ever did. Anything we own is the end result of global cooperation on a scale that plainly goes over the heads of most economists, along with the reporters who parrot their views. While they focus on country economic growth allegedly leading to labor and capacity shortages in specific countries, the reality per Nicas is that American prosperity is plainly an effect of feverish work taking place in locales far from the United States. Irwin’s model is incorrect, or better yet the one he relies on for his columns is.
In a front-page story in yesterday’s Times, Irwin lamented “issues that have dogged the world economy for the last decade” that allegedly include “an aging work force in many of the biggest economies, weak growth in productivity, excessive global savings and industrial capacity, and a shortage of worldwide demand.” No, this doesn’t make sense.
Up front, it always amazes this writer how confident reporters, economists and pundits are when it comes to analyzing the “world economy.” While it would be exceedingly difficult for most anyone (including yours truly) to calculate the size of the economy on the street they live on, Irwin and others ascribe to themselves a superhuman ability to assess the health of the world. Wow! Irwin surely doesn’t lack for self-regard…
Considering an “aging work force in many of the biggest economies,” implicit in Irwin’s analysis is flawed Phillips Curve modeling which assumes countries are impregnable fortresses of economic activity threatened by worker and capacity shortages, as opposed to interconnected ones. In Apple’s case, though it has some manufacturing capacity in the U.S., most of it is located well outside the U.S. Crucial there is that per Nicas yet again, the final manufacture of iPhones in China can only take place after the production of countless inputs well away from China. This is all a long way of saying that there will never, ever be “inflation” of the labor and capacity utilization variety when it’s remembered how globalized is the production of just about anything.
Better yet, Irwin’s analysis misses how much automation renders the notion of an “aging work force” a dated concept to begin with. Not only will the latter further mitigate always overstated labor-supply problems (when’s the last time you the reader dealt with a live person while buying airplane or movie tickets, or while at the bank and/or gas station?), it forgets yet again that the only closed economy is the world economy. Unless the global labor force is aging out of existence, which it’s plainly not, Irwin’s assumptions about labor don’t amount to much.
The analysis gets worse when Irwin tacks toward “excessive global savings.” There’s quite simply no such thing, as any CEO or entrepreneur could have explained to Irwin. Businesses and entrepreneurs are endlessly in search of the savings without which they cannot progress. Better yet, investment bankers are compensated well not because savings are in “excess,” rather they are because what’s essential is always and everywhere difficult to access. Crucial here is that savings never lie dormant.
Indeed, unless Irwin believes that these “excessive global savings” are hiding under mattresses, they’re most definitely coursing through the global economy, rapidly being directed to their highest use. The latter is a reminder that resources generally don’t lie idle precisely because savings don’t. By extension, there’s plainly no problem of too many resources, but as most any commercial type could explain to Irwin, there’s always a problem of not enough in the way of resources. Too much liquidity is a “problem” that microscopically few businesses and entrepreneurs have ever experienced.
That they haven't calls into question Irwin’s lament about “a shortage of worldwide demand.” Not really. Production is what enables demand, and as the endless drive for liquidity among businesses indicates, demand is only limited by an ability to supply. In short, Irwin’s assertions that the “world economy” is beset by “excessive global savings” and “a shortage of worldwide demand” plainly contradict one another. Figure that if the impossibility of “excessive” savings were a reality, the presumed lack of demand would quickly correct as producers accessed the resources necessary to produce in order to consume.
Which brings us to Irwin’s definition of inflation. He sees it as an effect of too few workers and too little capacity, but per Nicas one last time, there’s no such thing as the inflation or lack thereof that Irwin has imagined. To be clear, his definition not only perverts inflation’s real meaning (a decline in the value of the unit of account – in our case, the dollar), but it plainly does not exist.
Back to reality, true inflation is an effect of a shrinking currency. Which means that periods of inflation are logically periods of slow growth as a declining currency deters investment without which there is little growth. Basically Irwin gets it all backwards. In his naïve attempt to explain to the gullible the health of the “world economy,” Irwin only succeeds insofar as he reveals an ability to chase his own tail.
